Acquisitions are a necessary part of innovation and growth—especially for large companies.
Large companies—especially those that are publicly traded—have immediate revenue responsibilities. But they don’t have an unlimited capacity to invest in early, unproven ideas. When they do make these investments, outside factors like revenue pressures, market fluctuations, leadership changes, and R&D priorities can make project funding hard to come by.
So, for enterprises in these situations, acquiring early (often pre-revenue) companies can be a powerful move.
You just have to go about it the right way.
I lead R&D for a ~$25B public company and have founded two companies and taken them from formation to successful acquisition by Fortune 500 companies. I’ve seen firsthand how game-changing acquisitions can be. But acquiring a company isn’t as simple as doing some market research and picking the one that looks best. In my experience, the best acquisitions have much more meaningful data behind them and are often evolutions of long-term relationships.
Why should you even consider acquisitions?
- For transformational products. You can’t build every technology. Some companies think that because they’re big, and because they have money, they can do anything. That’s just not the case—and that’s okay. Success with one product, in one category, isn’t necessarily a predictor of success elsewhere, and disruptive products tend to come from scrappy organizations.
- For the unrivaled focus of smaller companies. To be a small, early-stage company is to work with full focus on solving specific customer problems. You’re constantly collecting data about their needs and pivoting your priorities to meet them. For a large company, having a nimble, data-rich operation under your umbrella gives you access to light-speed innovation you probably wouldn’t be able to do yourself.
Overall, the reason for a large company to consider acquisitions is because you have limitations. And as leaders, we’re responsible for having that awareness. You’re limited by your specialization, you’re limited by your size, you’re limited by the obligations you have to your shareholders. Small companies aren’t limited in any of these ways, and so their potential is, well…in a way…limitless.
How to do acquisitions the right way:
- Develop a partnership before the acquisition (sometimes). I advocate for not jumping into a purchase, before you have a working relationship with the company. Start with a lower-stakes project—e.g.: a marketing agreement, distribution arrangement, or product co-development agreement—and work your way up from there. Acquiring a minority stake is on this continuum and you may consider the above before acquiring a stake, or at the very least acquiring a minority stake before acquiring the entire company.
Now, this doesn’t always apply but developing the relationship slowly gives you information about how you collaborate, whether your priorities align, and what you’d stand to gain from acquisition. This is data you could never get by looking at a balance sheet.
- Focus on the people as much as the financials. When you acquire a company, you’re not just buying their IP/patents/books of business. You’re starting a long-term engagement with their people. If the culture is a bad fit, that’s going to cause long-term friction between your unit and theirs. But if the culture is a good fit, the whole will be greater than the sum of its parts.
Some companies view acquisitions as a way to buy up competing IP without retaining the people. I don’t like this approach because the acquiring company necessarily has a worse understanding of the IP—they didn’t live it every day, so they don’t get it at a core level. Engaging with the people, keeping them around and happy gives you much more competitive advantage than cutting them loose.
- Understand that acquisition means continuous investment. Especially when acquiring companies that are pre- or low-revenue, people don’t always realize that they’re going to spend more than the initial price tag. You wouldn’t buy Netflix and defund the Stranger Things production set budget. You gauge your acquisition to the reality that their investments are yours, too.
As you start the planning phase, you may identify four players in the market and not know which way to go. Rather than going all-in from day one, start developing relationships with each, and see which one yields positive results the quickest. Acquiring a company is basically injecting new DNA into yours—pick your partners wisely.